Capital Gains Tax
Business owners
Status quo
New Zealand has no capital gains tax on companies, so you won’t be taxed on any profits you make by selling a business.
What’s proposed
The Tax Working Group says all company shares and all assets held by companies — including land, plant and equipment (although not trading stock) — should be subject to capital gains tax (CGT).
This would apply to all gains made after the proposed start date of April 2021. Any valuation gain before that date would not be taxed.
Gains would be treated as income and taxed at the business owner’s marginal tax rate.
Example
A mechanic who owns and operates the business has assets including land, buildings and a range of valuable machinery and equipment. They also own any goodwill that is part of the business’ brand and reputation. Any increase in the value of all these things would be subject to CGT.
Exemptions Partial sale
The sale of parts of the business or specific equipment would not be subject to CGT. That would be taxed under current stock trading rules.
Roll-over
The Tax Working Group has suggested a roll-over exemption for small businesses (which it suggests are those with annual turnover of less than $5 million). The roll-over means the mechanic would not pay CGT if the business premises are sold and the money is reinvested in a similar, expanded business.
Retirement tax rate Owneroperators who sell a business to retire would pay a lower tax rate — comparable to that on KiwiSaver (5.5%, 12.5% and 28%) for up to $500,000 of capital gain.
What business thinks
Alan McDonald, general manager of advocacy with the Employers and Manufacturers Association (EMA), says feedback from members has been universally negative. There were concerns about the compliance costs associated with issues such as valuing companies, he said.
“That’s a significant cost. And how do you value something in a small business where basically the business is in that person’s head?
“Take goodwill, if you had a partner exiting and somebody who wants to buy your business. You’ll get two valuers, you’ll get two different valuations depending on what sort of brief they were given. How do you sort that one out? It’s awful.”
There were also concerns about the impact on the retirement plans of small business owners.
But the biggest concern from the EMA’s point of view was that it was a real disincentive for businesses to grow, he said.
“We have a big issue in New Zealand with getting small to medium businesses to grow anyway.
“That is the money you might have put into hiring a new staff member, upskilling a staff member or buying the new technology that makes you more productive.
“You’re providing another disincentive to grow the business, you are providing another reason to just sit there . . . which for various reasons, a lot of businesses in New Zealand do.”
What should Government’s final policy look like?
“I guess the hope is, we don’t get one,” McDonald says. “They keep moving the reason for why we are having this. It was going to solve the housing crisis and now it’s because it’s unfair. So in the first instance we’re just not seeing what is the problem they are trying to solve.”
What do you think that policy will look like?
“I think Winston Peters is the answer to that. What will it look like? I think we’ll just end up with something that’s very watered down, that just looks at the housing market, the rentals. That seem to be the sector that they want to fix, everything else has been caught up in this and that’s where it will end up.”
The expert’s view
The biggest concern from a tax policy perspective is the complexities that would be created, says David Snell, EY’s tax leader. Complexity in tax policy tended to build artificial boundaries. That created issues for the fiscal integrity of the regime — and the IRD’s ability to enforce it.
“There is a question about how much you can justify a special rule for small businesses compared to other businesses. Any business faces the same disposal and reinvestment decisions. It’s hard for me to see a clear and obvious boundary between a business with $5m turnover and a business with $5.1m turnover.”
Those boundaries, where very similar transactions were treated in different ways for no obvious reason, which were almost inherent in capital gains taxes, tended to lead down a path to ever greater complexity, he said.
The starting valuations required for measuring capital gain could also be very complex, he said — particularly for smaller businesses.
The Working Group had left the approach to valuation quite open, and it was likely that businesses would be given an extended period to carry out valuations.
“Realistically, it is going to be a source of complexity,” said Snell. Professional valuers typically offered a range, and what something was actually worth was hard to accurately determine until someone was prepared to buy it.
Snell’s view is that it would be better for the IRD to take a flexible approach to valuations, at the risk of forgoing some revenue, rather than trying to take a hard line.
“Let’s get as many assets as we can into a capital gains tax base and not worry about the accuracy too much,” he said. “If some kind of simplicity can be traded off against accuracy, I think it would be manageable.”
But a bigger concern about complexity involved the treatment of business losses, he said. The group’s approach was broadly to allow capital losses to be treated equally with revenue losses. So if you made a capital loss you could offset that against taxable income. But there were also lots of rules limiting that principle.
The more you had to ring-fence your capital losses, the more boundary issues were created, said Snell.
“I think the Government is going to have to look at that if it wants the scheme to have fiscal integrity.” Whether the proposed regime might discourage business growth was also an issue, Snell said.
“To my mind that’s a much bigger problem because of the way this capital gains tax has been designed — where you’ve got taxation at your full rate, with no allowance for inflation.”